Company A has a bond outstanding with 10% coupon rate; 10 year to maturity, and face...

Company A has a bond outstanding with 10% coupon rate; 10 year to maturity, and face value of $1,000; interest is payable annually. A similar bond yield to maturity is 7%. By prior agreement the company will skip the coupon interest payments in years 5, 6, and 7. These payments will be repaid without interest at maturity. What is the bond’s value?

Solutions

Expert Solution

Compute the annual interest, using the equation as shown below:

Annual interest = Face value*Rate of interest

= $1,000*10%

= $100

Hence, the annual interest is $100.

The interest for year 5, 6 and 7 will be paid at the time of maturity along with the face value. The face value of bond is $1,000 and the outstanding interest for 3 years is $300. Hence, the total amount paid at maturity is $1,300.

Compute the value of the bond, using MS-excel as shown below:

The result of the above excel table is as follows:

Hence, the value of the bond is $1,163.

jeff jeffy answered 1 year ago

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